Lexus To The Rescue

Losing luster in the luxury market at home, Toyota is rolling out the marque to fight European imports

July 11, 2005, 12:00 AM EDT

With a 45% share of its domestic car market, a global franchise that may soon make it the world's biggest carmaker, and profits that auto execs the world over would kill for, Toyota Motor Corp. (TM
) doesn't have many weaknesses. Yet there is one area where Toyota worries its dominance is slipping: domestic sales of luxury cars. While the company is still Japan's market leader in upscale autos, its three German rivals -- Mercedes-Benz, BMW, and Audi -- have become more alluring to Japan's wealthiest car buyers. Those three brands alone sold a combined 96,000 vehicles in Japan last year, and overall imports account for about 60% of total sales of the highest-end cars costing more than $45,500.

This summer, Toyota will begin fighting back. Its weapon of choice is Lexus. Sure, the marque has been around since 1989, but it was designed mainly with the U.S. market in mind, and Toyota has never sold vehicles under that name in Japan. The carmaker will remedy that starting on Aug. 30, launching a pair of Lexus models -- the GS sedan and SC convertible -- previously sold under the names Aristo and Soarer. They will be followed in September by the sporty Lexus IS sedan -- now called the Altezza -- and top-of-the-line LS sedan (a.k.a. Celsior) next summer. Toyota aims to initially sell around 60,000 Lexus-branded vehicles a year in Japan. "After 15 years of success in the U.S., we're ready," says Hiroshi Nishiyama, the Toyota managing officer in charge of the Lexus rollout. "We're hoping to pull new customers into the luxury-car area."

If all goes as planned, annual Lexus sales in Japan could hit 100,000 by 2010, which would give Lexus models more than a third of Japanese luxury sales. The initial four models that Toyota will re-brand as Lexus cars now make up around 10% of the market. Sales managers in Japan have a good playbook to follow. In the U.S., Lexus has outpaced rivals such as BMW, Cadillac, and Mercedes to clinch the title of top-selling luxury brand for the past five years. It has done that by offering premium quality, a great showroom experience, and a series of appealing vehicles. American drivers' demand for the entry-level RX sport-utility vehicle and ES sedan pushed U.S. Lexus sales to just shy of 290,000 last year, compared with 221,610 for Mercedes.

With profit margins almost double those for nonluxury vehicles, Lexus sales go a long way toward explaining how Toyota earned $4 billion from North America alone last year. But it could be a while before the company achieves those kind of numbers in Japan -- if ever. The nation is just emerging from a 10-year recession, and the market for passenger cars remains below 2000 levels -- growing only 0.5% last year. While not as hard hit as midrange sedans in recent years, sales of luxury cars are way short of their peak in the early 1990s, as yen-pinching car buyers have turned to cheaper, smaller vehicles. And profit margins on Toyota-branded luxury cars have been far smaller than for the Lexus models the company sells abroad.

The delay in bringing the brand home, however, is largely due to opposition from Toyota's own dealer network. There were already too many Toyota sales channels and showrooms in Japan, the dealers argued, and no room for the kind of distinct dealership chain Lexus had set up in the U.S. To pave the way for the introduction of the Lexus, the company last year overhauled its sales network, merging two of its five distribution channels. Toyota began inviting dealers to apply to become dedicated Lexus suppliers in 2003. As a result, 140 Lexus dealerships will open in August, with an additional 40 planned.

RITZY SHOWROOMS

The timing is right. For one, Japan's economy is gradually recovering. Gross domestic product grew 1.5% last year, and luxury-car sales have stabilized at around 300,000-350,000 annually. Most important, Toyota execs are tired of standing by and watching BMW and Audi gain market share. "Toyota's main focus is obvious: to capture one of the most profitable and stable vehicle segments in Japan," says Koji Endo, an analyst at Credit Suisse First Boston (CSR
) in Tokyo.

Toyota is leaving nothing to chance. Much as it has done in the U.S., the company plans to introduce new standards of customer care. The flagship Lexus Takanawa dealership in Tokyo boasts marble and granite floors, plasma-screen TVs, and plush chairs made of the same leather as the seats in Lexus cars. In a sign that Toyota means business, the showroom is just a few hundred meters down the street from a BMW dealer. BMW says it welcomes the competition. "We might lose some customers, but some of those visiting the Lexus showroom will also visit our dealership," says Akio Iio, manager of BMW's Takanawa showroom.

Toyota employees at Takanawa and other dealers are being groomed to give clients the ultimate sales experience. In March, Toyota opened the Fuji Lexus College in Shizuoka, where every one of the 2,000 Lexus employees -- from mechanics to concierges -- will attend training sessions. Lexus staffers at every level are taught how to treat clients, lectured on Lexus' design innovations, and even given instructions for proper handling of the cars on the road. "We want them to have a full understanding of the philosophy," says Toyota's Nishiyama.

Toyota is also promising high standards for after-sales care. Each Lexus will be sold with a five-year warranty and free maintenance for three years, better than the 3-year warranty and six-month check-up for other Toyotas. Customers will be able to access a dedicated Lexus call center 24 hours a day, where they can make both car-related inquiries and reservations for hotels and restaurants. "We want to respond to the needs of customers who are very specific about what they want in a car," Katsuaki Watanabe, Toyota's new president, told reporters at a press conference in Tokyo on June 27.

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Of course, German carmakers may have less to fear than Toyota hopes. Considerable cachet still goes with cruising the streets of Tokyo in a luxury import amid a sea of Japanese vehicles. Breaking through that image barrier won't be easy. "Undoubtedly, there are many BMW and Mercedes lovers that will want to stick to those brands even if the Lexus is a better car," says CSFB's Endo. That may be, but from August on, the German companies will have to fight for customers against a dogged rival that has already proven it can beat them in the U.S. market.